The timber industry is headed into some promising times. It is simultaneously experiencing the cessation of negative events and the start of positive ones.
· The housing crisis is ending and domestic home production is once again on the rise.
· Excess supply and the resultant price declines from forced harvesting due to the Canadian pine beetle epidemic are nearly concluded.
· The sustaining Chinese economy combined with its paucity of forests creates excellent export potential.
· High oil prices increase the viability of biomass for heating and electricity.
· Increasing options for revenue as entitlements and conservation efforts become more prevalent.
While the industry is looking strong, we must look closer at the individual companies to ascertain which is in position to benefit the most in the upswing of the cycle.
Rayonier Inc. (RYN)
Rayonier is the most global of the timber REITs with 45% of its sales coming from outside the US. Pending the prosperity of China, RYN is in an excellent position to capitalize on exports with access to multiple West Coast ports and through its joint venture on timberland in New Zealand. Also contributing to its global stature, is its commanding lead in the specialty fibers business. At the 2012 REITWEEK conference in New York, RYN claimed to have access to fairly exclusive technology which makes them better at producing specialty fibers than its competitors. While demand for these fibers is steadily increasing, investors should keep an eye on the potential for more competitors as companies become adept at this specialized production.
Plum Creek Timber (PCL)
With 6.6mm acres, Plum Creek represents the nation's largest private owner of timberland. It is seeking to opportunistically sell about 1.1mm acres of its "non-strategic" land. Portioning it off and selling to individuals seems to be an option with projected market values ranging from $2000 to $4000 per acre. As PCL has a low cost of debt with a weighted average around 4% and sufficient EBITDA coverage of debt, it is in no hurry to divest of its land. Instead, PCL is strategically downsizing. While some acquisitions are being made, share repurchases of $428mm show management is more interested in creating per-share value than increasing overall company size. Since most of the repurchased shares were at a cost of under $37, and it now trades at $43.84, this maneuver seems accretive. In terms of PCL's positioning to glean benefit, it should experience a small but across the board effect due to its high diversification both geographically and by product output.
Potlatch Corp (PCH)
With all of its timberland in Idaho, Minnesota and Arkansas, Potlatch is the most concentrated of the timber REITs. This leads to a fairly binary outlook. If the US housing market booms, Potlatch is positioned for nearly its entire portfolio to experience large revenue growth. This boom would be further bolstered by its manufacturing plants located near each of its timberlands so it can prepare materials for housing and receive an even better margin. However, its relative lack of port access makes it less able to capitalize on international demand. Potlatch is really banking on domestic sales picking up.
Unlike the other timber REITs which seem like very stable investments, Potlatch has some balance sheet issues which make it a little riskier. It has a 6.9% weighted average cost of debt as compared to around 4% for the other timber REITs. Additionally, PCH's balance sheet includes $137mm dedicated to liability for pensions and other postretirement employee benefits. With total assets of $692mm and only $131mm in stockholders equity, that pension plan seems excessively large.
Weyerhauser Co (WY)
While Weyerhauser stands as a very prominent timber company with nearly $4B in land assets, it is less of a pure timber play than the aforementioned companies as it still participates heavily in non-land real estate. This portion of its business is largely dedicated to the building of single-family homes. Using Weyerhauser lumber processed in Weyerhauser mills to build Weyerhauser homes has created industry leading margins for its real estate business.
A recovery of the US housing market would doubly benefit WY through both its timber and real estate businesses. Additionally, West and East coast port access, along with over 300K acres of timberland in Uruguay provide excellent access to international markets.
Disclosure: This article is for informational purposes only. It is not a recommendation to buy or sell any security and is strictly the opinion of the writer.